Top 13 Nerd’s Eye View Blog Posts Of 2013

Executive Summary

As we come to the end of 2013, I’m thankful to all of you, the readers who continue to visit Nerd’s Eye View more and more often and share this content with your friends and colleagues (which is greatly appreciated!). The continued growth of this blog led to its re-designed launch at the end of this summer, and you’ll continue to see enhancements coming in 2014 (if there’s something you think we’re still missing, please let us know in the comments!).

As busy as the year can be between life and work, though, I realize that many of you don’t have the time to keep up with everything that’s written here, and the ever-present challenge of blogging is that articles, once published, quickly vanish into the archives, never to be seen again outside of an occasional Google search from time to time. Accordingly, I’ve compiled for you this list of the 13 most popular articles I wrote this year on Nerd’s Eye View (along with our most popular guest post!). So whether you’re new to the blog, or simply haven’t had the time to keep up with everything, I hope that some of these will (still) be useful or of interest to you!

Thanks for a great 2013, and looking forward to an even better 2014!

Tax Planning

Understanding The New Premium Assistance Tax Credit – As a part of the Affordable Care Act, 2014 marks the start of new “Premium Assistance Tax Credits” designed to help make health insurance more affordable for those who earn less than 400% of the Federal Poverty Level (individuals with income up to $45,960 and a family of four earning $94,200, which means the credits potentially span 2/3rds of all Americans). Although the credits formally take effect next year, their relevance kicked in this year with the opening of the new health insurance exchanges on October 1st, as the tax credits can have a tremendous impact on the total cost of coverage. Whether buying health insurance proactively for protection, or simply to avoid the individual mandate, managing the premium assistance tax credit may become a staple for financial planning in the future, especially given how severely the phaseout of the credit can impact marginal tax rates.

Harvesting Losses Or Harvesting Gains – Planning Around Four Long-Term Capital Gains Tax Rates – With the passage of the American Taxpayer Relief Act of 2012 (the so-called “fiscal cliff” legislation) creating a new top tax bracket for long-term capital gains, and the simultaneous implementation of the new 3.8% Medicare surtax on net investment income, the taxation of capital gains has suddenly gone from a relatively simple 2-bracket system (0% for those in the bottom two ordinary brackets, 15% for everyone else) to a more complex 4-tier tax bracket structure: 0%, 15%, 18.8%, and 23.8%. The end result of this new capital gains tax structure is that just indefinitely deferred capital gains and harvesting losses year after year can create situations where clients actually finish with less wealth, because the gains accumulate so large that they actually drive the client into a higher capital gains tax bracket. Accordingly, while capital loss harvesting is still an effective strategy for high income years, those falling within the lower tax brackets may actually be better serving by harvesting capital gains, rather than losses!

Understanding Marginal Tax Rate Vs Effective Tax Rate And When To Use Each – Despite how crucial it is for good tax planning, there is remarkable confusion about what tax rates should be used in planning: marginal or effective tax rates? Ultimately, proper planning should always be done with marginal tax rates from year to year, while effective tax rates are best used to understand and compare relative tax burdens between people (or the total share of wealth/income that will be lost to taxes). However, the reality is that determining a marginal tax rate is more complex than just looking at a tax bracket alone; the marginal tax rate may span multiple tax brackets, be impacted by the presence (or absence) of other income, and be further complicated by the phaseout of various deductions and credits.

Permanent Portability Of The Estate Tax Exemption – Is It Time To Bypass The Bypass Trust For Good? – Along with changing ordinary income tax brackets and long-term capital gains treatment, the American Taxpayer Relief Act of 2012 also made permanent several key estate planning rules, including the inflation-indexed $5M exemption (scheduled to rise to $5.34M in 2014), the unified gift and estate tax exemptions, and portability of the unused exemption from a deceased to surviving spouse. With the rising estate tax exemption of the past decade, the number of estate tax returns being filed has already fallen by 95%, and the availability of portability both reduces exposure to the estate tax, and more importantly makes it unnecessary for most married couples to use a bypass trust to “preserve” the estate tax exemption at the first death. Ultimately, there are still several reasons to continue to use bypass trusts – including sheltering future growth from estate taxation for very high net worth clients, planning around state estate taxes, and for non-tax purposes like divorce and asset protection. Nonetheless, the permanence of portability, coupled with the rising estate tax exemption, will make “traditional” bypass trusts far less necessary for most clients going forward from here!

Practice Management/Career Development

The 8 Best Conferences For Financial Advisors In 2014 – As someone who will see upwards of 70 conferences this year, this article lists my recommended “best conferences” picks for financial advisors in 2014, organized by the categories Best Technical Content, Best for Advisor Technology, Best for Advanced Practitioners, Best Investment Management, Best Overall Value, Best Overall Financial Planning Conference, Best Virtual Conference, and the Best Practice Management conference. Descriptions of each conference are included, along with the key details of timing and cost. The article also includes coupon codes for several conferences that have offered discounted rates for the Nerd’s Eye View blog readership!

Why Aren’t Checklists A Financial Planning Standard? – As financial planning becomes increasingly complex, it’s more and more difficult for a financial planner to recognize every planning issue, opportunity, and concern from memory alone, which means there is a rising risk of “malpractice” and client errors. In other professions, this challenge of managing complexity is handled by the development of checklists; as it turns out, even relatively simple checklists can be remarkably effective at reduced accidental errors and momentary professional lapses. Yet oddly enough, despite the repetitive nature of financial planning, with similar analyses done for every comprehensive plan, the use of checklists is rare or non-existent in most financial planning firms. Is it time for us to start developing checklists and making them a financial planning standard?

Three Financial Planning Business Models To Effectively Serve Gen X And Gen Y Clients – As financial planning slowly and steadily shifts its focus from being solely on baby boomers and towards Gen X and Gen Y, many have questioned whether the younger generations can be served profitably and how to do so. Accordingly, this article highlights three prospective business models to serve a younger (and less AUM-centric) generation: ongoing financial planning monthly retainers structured like a gym membership; an implementation model combining a state RIA and insurance broker general agent (BGA) relationship to offer financial planning, basic AUM, and term life, disability, and health insurance; and simply operating an AUM model (perhaps partially supplemented by monthly retainer fees) with lower minimums (recognizing that most large AUM firms today started with lower minimums as well!). The bottom line: while business models serving Gen X/Y may not be the multi-million-dollar businesses that large RIAs happen to be, it’s entirely feasible to create successful, profitable financial planning practices serving the younger generations!

What If Financial Planning Was More Like A Build-A-Bear Experience? – While the outcomes of financial planning done well are very favorable, it’s hard to say the same about the actual client experience of going through the process, which one researcher found after a series of focus groups is like a combination of “math class, marriage therapy, and a dental exam”, which to say the least probably reduces how often financial planners are referred by their clients. Yet the reality in other industries is that having a good client/customer experience is not simply good for word-of-mouth business (though it helps); a good client/customer experience can actually sell for a premium value. A case-in-point example are the “Build-A-Bear” workshops that have turned the purchase of a purely commoditized product (a teddy bear) into a high-end teddy-bear-buying experience – for which buyers shell out 2-3x the cost and spend 5-10x the time to wind up with a substantively similar product in the end. So how much could a better “financial planning experience” really matter? What would your business look like if clients happily spent more money and invested more time in doing their financial planning with you?

Insurance

How Coming Health Insurance Exchanges Will Drastically Impact Career And Retirement Decisions – Although the health insurance exchanges are now open (albeit with mixed success due to technology problems), the real impact of the Affordable Care Act is how guaranteed availability of health insurance may change client career and retirement decisions for many years to come. After all, the reality for the past several decades is that employment – having a job – was a requirement for all but the healthiest (who could be individually underwritten) to have access to health insurance. Now, clients are guaranteed access to health insurance regardless of their employment situation, which means access to health insurance is no longer a barrier for those who want to retire early (prior to Medicare eligibility), go back to school, become an entrepreneur and start a new business, or go work for a small business (that doesn’t/can’t afford to offer health insurance). Of course, the new rules merely guarantee access to health insurance – clients still need to come up with a strategy to pay for it – but the lingering question all planners should be asking their clients now is “If you had guaranteed access to health insurance regardless of your employment situation, would you still be working where you are and/or doing what you’re doing now?” For many clients, the answer appears to be “no” and the door is now open to new opportunities.

Why Cancelling An Existing Whole Life Or Universal Life Policy May Be A Bad Idea – As needs and circumstances change, many people who once purchased “permanent” life insurance (e.g., whole life, universal life, etc.) find that they no longer need their coverage, and often decide that it would be preferable to simply take the cash value and walk away, rather than continuing to maintain the policy (especially if ongoing premium payments are still required). However, the reality is that even if the permanent insurance is no longer needed, it doesn’t always make sense to cancel it. The reason is that life insurance, when held until death, still produces a relatively favorable bond-like return, especially compared to today’s interest rates. Accordingly, for those who really don’t need the coverage, but can afford to keep it and don’t actually need the cash value, holding onto a permanent insurance policy – and even paying ongoing premiums – may still be a better “guaranteed” bond-like return for beneficiaries than any other investment alternatives of comparable risk available today!

Investments

Why Inferential Statistics Is A Lousy Way To Evaluate Active Managers – Inferential statistics is the framework commonly used to evaluate whether an active manager’s results can be distinguished from what might occur due to random chance alone; if the outperformance is great enough relative to the ‘background noise’ then the results will be “statistically significant.” Yet the mathematical reality is that markets are actually so volatile and noisy, even if an active manager really was delivering superior results, it would be almost impossible to detect; even if a manager really is superior and does deliver 100bps of annual outperformance, year after year, a standard test for statistical significance would fail to detect the manager’s skill 96.8% of the time after 5 years, 96.4% of the time after 10 years, and 95.4%5 of the time even after 30 years! In other words, simply put, even if a manager is skilled enough to consistently outperform markets for decades, a test of statistical significance is virtually useless to identify the manager’s skill!

Retirement

Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better? – A new research paper finds that the conventional wisdom that equity exposure should decrease throughout retirement as clients age and their time horizon shortens may actually be wrong; in fact, an asset allocation glidepath that starts more conservative and increases equities over time appears to actually perform better! For instance, a portfolio that starts out at 30% in equities and finishes at 60% has superior results to a portfolio that simply maintains an annually rebalanced 60/40 stock/bond portfolio throughout retirement, and both perform better than a portfolio that starts out at 60% in equities and decreases to 30% by the end of retirement. The reason the strategy works is that in scenarios where markets give good performance early on, the retiree is so far ahead that there’s little danger to the final outcome by increasing equity exposure; on the other hand, if markets give poor returns early on, the rising equity glidepath results in less equity exposure in the early years (when the bad returns occur) and effectively dollar-cost-averages into markets such that the equity exposure increases as equities get cheaper, leading to a superior outcome. Notably, this “glidepath effect” also appears to explain much (but not all) of the benefits of partially annuitizing a portion of the portfolio at retirement as well.

Renaming The Outcomes Of A Monte Carlo Retirement Projection – One of the virtues of using Monte Carlo analysis for retirement planning is that it shows a range of possible outcomes, rather than just a single metric like a specific dollar amount of projected wealth in 30 years. However, as Monte Carlo projections become increasingly popular, the focus is again shifting towards a singular outcome: the probability of success (or failure, depending on your perspective). The problem is that not only does focusing on a single-number result once again miss important nuances – for instance, situations where a lower probability of success might actually be the preferrable route because it also has a lower magnitude of failure – but framing the results in this matter also skews the client decision. After all, the reality is that plans rarely ever “fail” by just continuing spending until the day there’s suddenly no more money and the checks start bouncing; instead, at some point as the portfolio begins to get depleted, (most) clients adjust their spending. Similarly, a probability of “success” is measured the same regardless of whether $1, $1,000, $1,000,000, or more is left over at the end; as a result, a probability of success is really more like a probability of “excess” instead. So the next time you’re discussing Monte Carlo results with clients, trying referring to them as what they really are – a probability of adjustment (not failure), and a probability of excess (not success) – and see if a different frame alters the planning decision!

Bonus: Top Guest Post

Financial Advisor’s Guide To Establishing A Next Generation Financial Planning Firm – This guest post by financial planner Alan Moore shares his insights as a “next generation” Gen Y planner on how to put together a tech-savvy financial planning practice. Key technology includes not only the core tools like Moore’s choices for financial planning, portfolio reporting, and trading/rebalancing software, but also his tools for document storage, client communication, website hosting, newsletter delivery, and more. Also included are some more “cutting edge” technology solutions (at least from the financial planner’s perspective), including an online scheduling tool, electronic document signing, virtual meetings, etc. At the end, Moore also sums it all up, showing that he’s ultimately running his entire virtual practice on only $13,374/year. (If you’re interested in tech-savvy low-cost start-up options for financial planning, be sure to also check out Sophia Bera’s “Setting Up An RIA And Starting A New Financial Planning Practice On Less Than $10,000” as well!).